MAJOR CHANGE TO MORTGAGE APPROVALS!!!
On October 3, 2016 the Federal Government announced new Rules that will affect the Real Estate Mortgage financing across the whole country. This is HUGE! Listen up here is an easy break down.
Let’s start from the beginning. When you get approved for a mortgage, advisers will assess all your debt, assets and income. Their goal is to determine your Total Debt to Service (TDS) Ratio. Here is an example of how they calculate it:
TDS = Total Monthly Payments (Including potential Mortgage Payment)
Gross Monthly Income
In order to get approved, your TDS must be under 44%. Based on this, they can calculate the highest value you can afford for a home.
With interest rates hovering around 2.4%, you can see how Canadians are getting approved by basically just walking into a bank for amounts that are maxing out their TDS. In turn, the housing market has boomed in certain areas.
What did they change?
The federal government decided to set a new rule called the “stress test”. From Oct 17, 2016 onward, everyone going to get a mortgage approval will need to qualify at the posted 5 year fixed interest rate. Right now, the 5 year fixed interest is at 4.64%!!!!!!!! Again 4.64%!!!! That means your TDS must be calculated using the mortgage payments based on a 4.64%!
Thankfully this is only for the approval process. Your payments will still be made at a 2.4% interest rate as long as you are approved at the 4.64%!
How much does this affect Buyers?
Let’s put it this way. I did some quick math here. So don’t be commenting about oh your 15$ off or whatever. Just for the sake of the argument.
Let’s say you have room for $1,100 worth of Mortgage payments to max out your TDS ratio to 44%. Here is what you could afford with the old/new rules.
Current Interest (2.4%)
~ $250,000 Home
New Interest (4.64%)
Let’s get this straight…That is a 50k difference in the value of a home you could purchase with approved financing. That will be huge in the market! I am anxious wait to see how the market will react!
Why are the Liberals making these changes?
The liberal (federal) government hasn’t outright given all of their reasons for the changes yet. But, it is quite obvious!
Talk of interest rates increasing has been floating around for a few years now. Although it has a been a conversation topic, the government knows that in our current state, if the interest rates went up, thousands of people would default on their mortgages. This would be spiral into a similar situation as the 2008 crash in the United States, which we want to curb!
On the topic of avoiding to follow the path of the US, restricting lending with these changes is a fight against the rising prices of homes in Canada! If people can not get approved for a mortgage at these astronomical prices, the prices won’t increase anymore.
Usually, I do not agree with the Liberals but in this case, I believe it to be neutral. There are positives and negatives! Until we get more information that is my stand! If you have any questions please feel free to send me a message, comment, email, text or reach out to me through Social Media!
Sales Representative – Team Kurt
Coldwell Banker Charles Marsh